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Elastic/Rebase Token Explained
A rebase, or how it is sometimes called elastic (EST), is a cryptocurrency whose supply is algorithmically adapted to control its price. It's similar to stablecoins, so rebase tokens are usually pegged to another asset. But instead of using reserves to manage the peg, elastic tokens burn tokens in circulation or mint new tokens automatically.
The supply of elastic tokens can be pretty volatile, but its price and vice versa remain steady depending on which asset's price it's tracking. The code behind each cryptocurrency defines rules for the coin's supply, which means all the ways coins can be minted or burned.
Usual Tokem vs. Elastic Token
Let's take a newly minted bitcoin as an example, and it's created when miners successfully validate recent transactions. It's impossible to create bitcoin another way, and there is no way to destroy it. Bitcoin is designed this way to motivate mining and control the issuance of new tokens entering circulation, not to control the bitcoin price. Thus, bitcoin isn't a rebase token at all.
On another side of the scale, Ampleforth (AMPL) is an example of a rebase token. That's why the supply of the token is adjusted with the aim of keeping its price close to $1 for 24 hours.
So, if AMPL’s price goes up by more than a few cents, then all users who hold AMPL will be given extra tokens in proportion to their actual holdings. On the contrary, when the price falls below a certain bar, the opposite happens as tokens are proportionately reduced from the holders' balance.
Each AMPL token you own will still be worth $1, but the total value of all the AMPL tokens you own can hugely fluctuate.
Top 5 Elastic Tokens
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Here’s a list of the most popular elastic token according to their market capitalization:
Olympus Finance (OHM) is an algorithmic stablecoin that manages a floating price driven by the market without the 1:1 dollar collateral backing. OHM is not directly pegged to the US dollar. Each OHM token is backed by 1 DAI within their treasury.
The network aims to protect purchasing ability by price stability and has a rather deep liquidity level among DEXs and CEXs. The token can be used in several ways by being paired against many other assets in Web3 and as a trusty backing to collateralize other assets or deposited into protocols’ treasuries.
Redacted Cartel is a decentralized organization that especially focuses on governance tokens and voting power across many of the most influential liquidity management protocols in DeFi with the aim of providing meta-governance services to other DAOs in the space.
Its native token is BTRFLY and it acts as native governance and utility represents an index of the vote-escrow tokens held in the protocols treasury.
Since launching just over two months ago, the Cartel has become one of the largest holders of governance tokens like CRV, CVX, TOKE, and OHM.
It is the first decentralized cross-chain reserve currency protocol on the TIME token. Each TIME token is backed by a basket of assets in the Wonderland treasury, giving it an intrinsic value that it cannot fall below. Wonderland also introduces economic and game-theoretic dynamics into the market through staking and minting.
Our goal is to build a policy-controlled currency system, native on the AVAX network and then bridged across different chains, in which the behavior of the TIME token! In the long term, we believe this system can be used to optimize for stability and consistency so that TIME can function as a global unit-of-account and medium-of-exchange currency. In the short term, we intend to optimize the system for growth and wealth creation.
Klima DAO provides Web3 builders and users the opportunity to participate in the carbon market with the KLIMA token. The main features of KLIMA tokens are:
- fungibility: the ERC20 token standard
- backed: by at least 1 tonne of tokenized verified carbon offsets locked within the KlimaDAO treasury
- utility: KLIMA holders will have the right to vote on Klima DAO policy
The DAO plays the role of "de-central" bank, governing the monetary policy of the new carbon-backed currency, the same way a central bank regulates the monetary policy of a fiat currency. The project wants to build an economy around KLIMA by driving adoption and unlocking the growth of the crypto-carbon.
Ampleforth is a pioneer in working with an elastic supply. Ampleforth wants to be an uncollateralized commodity, where 1 AMPL targets a price of 1 USD. Rebases happen once every 24 hours.
The duration issue is pretty interesting. It distributes tokens for holders over a 10-year period. Geyser is a prime example of how liquidity motivations can form notable traction for a DeFi project.
Ampleforth is highly volatile, making it a risky coin to play around with.
It might make more sense to chart elastic supply tokens in terms of market capitalization. Since the price of individual units doesn’t matter as much, the market cap can be a more accurate barometer of the network’s growth and traction.
Elastic Tokens Strong Sides
The main concept was that the value of elastic supply tokens stays stable. That can be achieved thanks to supply adjustments. These tokens are usually similar to stablecoins because they tend to keep the value stable. But, of course, there are differences:
First, a stablecoin is a fixed exchange rate principle. It holds the stable coin’s price stable by pegging the price of the coin to another asset. But elastic supply tokens guarantee a targeted price with a time-changing supply of tokens. They don’t necessarily try to reduce the volatility as stablecoins do. Instead of that, they aim to decline it to such a level where the sought value of the elastic token is achieved.
Elastic Tokens Drawbacks
Elastic tokens are volatile crypto assets. The crypto market is volatile, but rebase tokens throw some oil to that bonfire. They are speculative assets and only experienced and well-prepared investors who practice proficient risk management should give them a try.
The upside happens once the market is an uptrend and a user gains excellent traction.
The same thing could be seen in a downtrend, so a user loses price value and the amount of total assets as each rebase happens, setting a spiral of negative rebases. That’s the worst case in which the supply changes cannot boost demand and stabilize the price and market cap again.